Income Elasticity of Demand

Topics Covered:

1. Positive Income Elasticity of Demand

• Income Elasticity greater than one (Ey > 1)
• Income Elasticity less than one (Ey < 1)
• Income Elasticity equal to one (Ey = 1)

2. Negative Income Elasticity of Demand

3. Zero Income Elasticity of Demand

Income elasticity of demand is the percentage change in quantity demanded to the percentage change in income of the consumer other things being constant. It is mathematically expressed as;

Ey= Percentage change in quantity demanded/Percentage change in income

Ey= Q2 – Q1 / Y2 – Y1* Y1/Y2

Where,

Q1= Initial quantity demanded

Q2=New quantity demanded

Y1= Initial income of the consumer

Y2= New income of the consumer

Ey= Coefficient of income elasticity of demand

There are three types of income elasticity of demand:

1. Positive Income Elasticity of Demand:

If the percentage change in quantity demanded is positive in response to the percentage change in income other things remaining same, then it is called positive income elasticity of demand. There is direct or positive relationship between income of a buyer and quantity demanded. A decrease in income also leads to an increase in quantity demanded and vice versa.

There are three possible cases of positive income elasticity of demand as follows;

• Income Elasticity greater than one (Ey > 1): If smaller percentage change in income of a buyer brings relatively greater percentage change in quantity demanded, then it is called income elasticity greater than one.

• Income elasticity less than one (Ey < 1): If greater percentage change in income brings relatively smaller percentage change in quantity demanded, it is called income elasticity less than one.

• Income elasticity equal to one (Ey=1): If the percentage change in income and quantity demanded are same then it is called income elasticity equal to one.

2. Negative Income Elasticity of Demand (Ey < 0):

If percentage change in quantity demanded is negative in response to the percentage change in income of the buyer then it is known as negative income elasticity of demand. There is indirect or inverse relationship between income and quantity demanded.

3. Zero Income Elasticity of Demand (Ey = 0):

If quantity demanded of the commodity is fully irresponsive to the change in income of the consumer then it is called zero income elasticity of demand. There is no relationship between change in income and quantity demanded so quantity demanded remains constant for all levels of income and the value of elasticity remains zero.